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The EU is slowly tightening the screw on Russia, with senior officials proposing yesterday to target state-owned Russian banks in its most serious sanctions so far. Ambassadorial talks on how precisely that is to be done continue today and the measures are likely to be enacted next week.

One key proposal is that European investors would be banned from buying new debt or shares of banks owned 50 percent or more by the state. These banks raised almost half of their 15.8 billion euro capital needs in EU markets last year. That is a big deal and there are increasing signs of investors turning their back on Russia lock, stock and barrel. However, with its giant FX reserves, the central bank can provide dollars to fund external debt for a considerable period of time.

The ambassadors did agree to add more people and entities to the EU’s asset freeze list, using expanded criteria including Russian companies that help to undermine Ukraine’s sovereignty. The 15 individuals and 18 entities, half of which are companies, will be named today. Russian shares are down about 1 percent in early trade.

The United States said Russia was firing artillery across its border to target Ukrainian military positions. It also said there was evidence the Russians intended to deliver heavier and more powerful multiple rocket launchers to separatist forces.

Russia’s central bank holds a policy meeting but is unlikely to give the economy much respite on the monetary policy front.
Last month, the central bank cut its growth forecast for the year to 0.4 percent and that was before sanctions were tightened by both the United States and European Union. But with inflation still well above its 5 percent target for 2014, the scope to lower interest rates looks somewhere between slim and none.

Rates were left on hold in June and the central bank said further hikes were possible if inflation remained above target.

Friday also sees reviews of Russia’s credit rating by both Moody’s and Fitch. Moody’s has a negative outlook on its Baa1 rating, Fitch is at BBB.

Russia’s top oil producer Rosneft will report Q2 results. The Kremlin-controlled company has been hit by U.S. sanctions. Moody’s has said Russian companies, including Rosneft, face a challenge refinancing $112 billion in debt due to mature over the next four years, which includes a hump to overcome in 2015.

The euro zone’s flash PMI survey came in pretty strong yesterday, showing the bloc’s private sector expanded at the fastest rate in three months to July, although growth in new business was driven mainly by companies cutting prices again – a worry when inflation is already non-existent.

Both this survey and Germany’s ZEW sentiment index have flagged a growing hit to confidence from the Ukraine standoff and the potential hit to the euro zone economy, particularly if gas supplies from Russia become a part of the chess game.

Germany’s July Ifo index is due out this morning and is forecast to creep lower however Germany’s GfK consumer confidence index, just out, showed German consumer morale rose to its highest level in more than 7-1/2 years heading into August as shoppers became more upbeat about their future income prospects than at any point since 1991.

GfK said the downing of a Malaysia Airlines plane over Ukraine last week was not factored into the survey, which was almost complete by that time, but said that this, along with the Gaza crisis, could hit consumer mood going forward. Separate euro zone money supply data will probably show bank lending dwindled yet again in June.

Britain seems to be largely immune to signs of a slowdown. Second quarter GDP data are due and forecast to show another three months of 0.8 percent growth – giving a healthy annualized clip above three percent. That should mark the point at which the economy finally claws back the ground it lost during the financial crisis and becomes bigger than it was six years ago.

More economists are starting to expect a first UK rate rise to come later this year rather than next and either way the Bank of England is odds on to be the first of the big central banks to tighten. That expectation has helped propel sterling to its highest level in nearly six years.

However, the rapid recovery now is relative. Germany recovered all its lost output during the crisis in 2010. France and the United States followed in 2011 and UK GDP per capita will only return to pre-crisis levels in 2017.

Gazan authorities said Israeli forces shelled a shelter at a U.N.-run school, killing at least 15 people, as the Palestinian death toll in the conflict reached 796 and attempts at a truce continue to falter.

The wreckage of an Air Algerie flight has been located after it crashed in northern Mali carrying 116 passengers and crew, nearly half of them French. Investigators say it appears to have broken apart when it hit the ground, suggesting it was unlikely to have been the victim of an attack.

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Based in London, I run the economics, economic policy and markets cover from the EMEA region. Previously, I was Chief UK Political Correspondent for seven years and have also been economics correspondent as well as holding general news and market reporting posts over a 20-year career.